Deal to test protectionist sentiment

U.S. government may end up with more objections

LONDON (MarketWatch) -- If France's Alcatel SA does agree on a merger with U.S.-based Lucent Technologies Inc., their proposed combination could run smack into hostile political headwinds in the United States, analysts said Friday.

The two giant telecom-equipment makers disclosed they're in talks on what was termed a merger of equals. But the pair reportedly envision a deal that would make Alcatel
ALA, -0.47%
the controlling shareholder of Lucent
LU
which performs some sensitive research and development on defense projects for the United States. See full story.

Their courtship, reviving a similar plan that was abandoned five years ago, comes at a time of increasing hostility in Washington toward deals that would transfer American-owned strategic assets into foreign hands.

Those sentiments came to the fore last year, when U.S. politicians blocked a Chinese company from buying Unocal, and they reached new heights earlier this month when lawmakers torpedoed a deal that would have given control of some U.S. ports to a Dubai-based company.

Rep. Duncan Hunter (R-Calif.), chairman of the House Armed Services Committee, wants to go further, with a bill that would prevent foreign companies from acquiring anything the Defense Department or the Department of Homeland Security placed on a ''national defense critical infrastructure list.''

Economic nationalism

The dealing also coincides with a general upsurge in economic nationalism in the United States, but even more so in Europe, which prompted some observers to say the Lucent deal likely will be structured in a way that guarantees it would be seen as French-led merger.

At this early stage in reviewing the prospects of an Alcatel-Lucent pact, analysts suggested that U.S. regulators would likely require more persuading than their counterparts in Paris will need.

"Lucent is involved in national security research in the United States. Therefore, a combination with a foreign company could raise national security concerns, particularly in the current political environment," said Hasan Imam, an analyst at Thomas Weisel Partners.

"We note that this was a big concern in the last round of negotiations in 2001 and some informed sources have attributed the failure of the merger talks to this particular issue," he added.

Of course, a lot has changed in the past five years. Lucent's business has shrunk considerably and the company's famed Bell Labs research center is no longer such an intellectual powerhouse.

"Bell Labs has been reduced to a shell of its former self," said longtime communications analyst Susan Kalla of Caris & Co. As a result, domestic opposition in the U.S. might diminish.

Nevertheless, Joanne Thorton, an analyst with Stanford Washington Research group, said the deal would likely lead the companies to file for a formal review by the inter-agency Committee on Foreign Investment in the United States. (CFIUS)

"If Alcatel purchases Lucent, or any part of Lucent's U.S. operations, then more than likely, the parties will notify the Committee on Foreign Investments in the U.S. for a review," Thorton said.

A filing under CIFUS is voluntary, analysts noted.

Such a filing would trigger an initial 30-day review period for the transaction that can be extended into an additional 45-day probe.

At the end of the review period, the Committee makes a recommendation to President Bush over whether the transaction poses no national security concerns, should be altered in some way, or opposed.

Bob Dolye, who tracks mergers for Sheppard Mullin Richter & Hampton LLP, said the transaction may generate some opposition in Congress, but nothing on the order of what greeted the now-scuttled deal for state-owned United Arab Emirates company Dubai Ports World to manage six U.S. ports.

The French government, meanwhile, never a devout adherent to free-market principles -- has its own concerns. It's reportedly compiled a list of 20 companies to protect from foreign takeovers, and used its intelligence service to sniff out potential hostile moves from abroad.

Cross-border deals

Paris also blocked Aventis from accepting a takeover bid from Switzerland's Novartis, and allowed the company to be sold instead to what was then Sanofi-Synthelabo of France.

France supported merging Gaz de France with Suez
SZE
in order to keep Italy's Enel
EN, +5.45%
at bay; and (along with the Luxembourg government) has tried to deter Mittal Steel
MT, -3.56%
from buying Arcelor (005786). It was also unhappy about the reported interest that PepsiCo
PEP, -0.60%
had in bidding for dairy products and drinks giant Groupe Danone
DA, +0.00%

Underscoring current sensitivities in France, President Jacques Chirac on Thursday night stormed out of a European Union summit after a fellow Frenchman started to speak English.

So, many observers assume Alcatel and Lucent will be walking on eggshells to win approval.

George Calhoun, a former telecommunications company executive and a professor at Stevens Institute of Technology in Hoboken, N.J., said the French government is unlikely to object -- as long as the headquarters end up in Paris.

"If it does go the other way, then I would expect for the French to raise some flags about that," he said.

But he said it appears that Alcatel is more likely to emerge as the acquirer, and pointed out the company already has a number of high-level American and German executives due to past acquisitions.

"I don't think," Calhoun added, "it will be a shock to them if significant numbers of U.S. management migrate to higher levels in the company."

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